Business opportunities and threats in China

When talking about doing business in China, two words tend to come up time and time again: opportunities and threats.

That was the case at a Hofstra University (Long Island, New York) conference on May 8 titled “US-China: Opportunities for New Business Partnerships.” Speakers included executives doing business in China, academics, economists, media members, and government officials.

Much the same, of course, could be said about opportunities and threats in other nations, but the magnitude of both in China dwarf those elsewhere.

For example, on the opportunity front, consider that at 1.34 billion people, China has the largest population on the planet. For good measure, China has been experiencing rapid economic growth for more than two decades, with real GDP rising recently at 9.2 percent in 2009, 10.5 percent in 2010, and 9.2 percent in 2011.

At the conference, Stephen Roach, a senor fellow at the Jackson Institute of Global Affairs at Yale University and former chairman of Morgan Stanley Asia, noted that, in terms of overall nominal GDP, China now stands as the world’s second largest economy behind the U.S., and should surpass the U.S. within a decade.

As for trade, China ranks as the United States’ second largest trading partner. In 2011, U.S. goods exports to China came in at $103.9 billion. Twenty years earlier, those exports stood at $6.3 billion. That 1,549 percent growth over two decades represents an explosion of opportunity for businesses and workers.

Meanwhile, imports from China grew from $19 billion in 1991 to $399.3 billion in 2011. That 2,002 percent leap higher points to expanded choices and better prices for American consumers, as well as businesses purchasing capital goods.

At the same time, though, uncertainties and threats lurk on China. Harry Broadman, chief economist at Pricewaterhouse Coopers, highlighted the inherent tensions in China’s economic and political systems.

After all, this is a nation run by communists who still issue five-year plans, yet at the same time tout markets and opening up their economy. Broadman noted that being caught between a capitalist economy and a socialist-market economy means China has problems like trying to get state-owned enterprises to behave like private firms focused on maximizing profits and minimizing costs. And China’s banks are not true commercial banks, but instead state-owned entities that lend to state-owned enterprises. What’s a non-performing loan under those circumstances?

It also must be noted that when the nation’s population is considered, China still very much is a developing country. For example, China’s per capita GDP ranks a mere 119th out of 226 nations, according to the CIA World Factbook, while the U.S. ranks number 12. Roach predicted that China would not catch the U.S. in terms of per capita GDP during the lifetimes of even the youngest attendees at the Hofstra conference.

And what about dealing with the huge and formidable bureaucracy? Martha McGarry, senior partner with the law firm Skadden, Arps, Slate, Meagher & Flom, LLP, has experience in that area, noting that many business deals require the approval of multiple ministries and commissions, and not just at the national level but at the local level as well. She also pointed out that foreign ownership of businesses in China frequently has to be structured through offshore vehicles, and controlled via operating agreements that can be limited and present significant challenges.

Poor property rights also ranks as a major threat. Again, not necessarily surprising with a communist government.

At the end of April, the United States Trade Representative released its annual “Special 301” report, which looks at how effective our trading partners are in protecting intellectual property rights (IPR). The Chinese government, of course, has been saying many of the right things in recent times about intellectual property rights, but that has not translated into a substantial, positive shift in actual policy.

It was noted in the 301 report, “A wide spectrum of U.S. rights holders reports serious obstacles to effective protection and enforcement of all forms of IPR in China, including patents, trademarks, copyrights, trade secrets, and protection of pharmaceutical test data.” In addition, “many companies are concerned that Chinese government agencies are inappropriately using market access and investment approvals as a means to compel foreign firms to license or sell their IPR to domestic Chinese entities.”

Finally, issues like corruption and human rights abuses present real problems. Those realities once again came into focus recently with the apparent murder of a British businessman in China, and the wife of a senior communist government official being a suspect. And then there’s the controversy over Chen Guangcheng, the blind Chinese legal activist who has criticized forced abortions and sterilizations under China’s one-child policy. He has faced prison, home detention, abuse of his family, and (when this column was written) confinement to a hospital, awaiting a decision on a new passport and his ability to leave for the U.S.

The big question: Will increased economic openness translate into greater demands by the Chinese people for political openness, and how might Chinese government officials react?

Here’s to hoping that this formidable nation makes a complete, peaceful transition to true freedom and even greater opportunity. If China does, both the Chinese and Americans will prosper as a result.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

Our Poll

What's your reaction to the Regional Business Alliance hiring Dirk Draper as president and CEO?

Great news. He's an energetic leader and will represent the city well.

Unsure. He can mend fences with political leaders, but how about economic development?

Too late. The organization will need years to recover from its missteps.